USD/CAD: Loonie to Flourish Amid Fiscal Cliff Hesitations

Even with the risk that the world’s largest economy could enter a recession, the Canadian dollar had the biggest intraday jump in almost two weeks against its US counterpart amid investor optimism about the country’s economic prospects. The Loonie is also forecast to flourish in the day’s trades on optimism that the US economy is recovering and lawmakers will reach a budget deal before the deadline.

The Canadian currency fluctuated after US lawmakers left for the Christmas holiday with only a week remaining to avoid automatic tax increases and spending reductions. The fiscal cliff could trigger an economic contraction for the US and adversely affect its trading partners, as well. Nevertheless, even with the US budget debate high on the list of potential risk factors in the financial markets, figures released late last week show that traders remain favorable on the longer-term prospects of the Loonie.

“Friday’s CFTC data suggested there was build in the net-long CAD position, so still sentiment is bullish,” said Camilla Sutton, Head of Currency Strategy at Bank of Nova Scotia, by telephone from Toronto. “However, the very-near-term risk is certainly fiscal-cliff negotiations, and then the holiday-type less-liquid markets.”

“The US economy has been recovering and the market is optimistic on resolution of the fiscal cliff,” Janet Kong, an analyst at China International Capital Corp., wrote in a note.

Further, oil prices rose in New York for the first time in three days as President Barack Obama and the US Congress prepared to assemble to discuss a budget solution to avert the looming fiscal cliff. Prices gained as much as 0.7 percent before Democrats and Republicans plan to convene tomorrow for another round of talks.

“The oil market’s movement depends on the fiscal cliff but I don’t think it will lose ground,” said Ken Hasegawa, an energy trading manager at Newedge Group in Tokyo. Considering the relationship between oil and the Canadian currency, the Loonie is estimated to benefit from an appreciation in oil trades.

Of these fundamental news, a short position is suggested for the USDCAD. Be mindful though of probable technical price corrections.